***OFF TOPIC***(This is another Larry rant about executive stock options)
How executives invest in the stock market. They give themselves free options, which can then be traded in for millions of dollars. That's the real secret to making money in the stock market.
But the problem is, if they get divorced, the ex-wives are now starting to want to grab part of that "free" money.
The article below is from today's New York Times.
Regards
Larry
nytimes.com
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August 23, 1998
In Executive Divorce, Who Gets Custody of
the Options?
By ROBERT D. HERSHEY Jr.
Kim Hislop vividly remembers sitting with her husband, John, on the
deck of their home in Hyannis, Mass., one day in 1993. She recalls
him referring to the stock options being dangled by Telex Communications
Group, a maker of communications products, which was recruiting him for
chief financial officer at the company headquarters in Minneapolis.
"This is going to be our brass ring," Mrs. Hislop recalls him saying of the
options to buy 12,000 Telex shares. And, indeed, it was quite a payoff:
When the company redeemed those options in a recapitalization prompted
by a takeover last year by Greenwich Street Capital Partners, a private
equity fund based in New York, the stake was worth an estimated $5.6
million.
But the Hislops, who had been married 22 years, divorced in 1994 and
are now battling over some of these options, which represented the
couple's biggest asset. "Now he wants it to be his brass ring," said Mrs.
Hislop, 49, a homemaker and mother who was awarded nearly $2 million
of the options but has sought a 50-50 split, or about $800,000 more. The
dispute, she said, "is about a woman's contribution to marriage."
Hislop would not comment on the case. His lawyer, Alan Eidsness, said:
"These were options that Hislop had to earn by continuing to do a good
job. They were for future performance. If he didn't work, he didn't get
them."
Such battles are increasingly common now that stock options have
become almost as ubiquitous in corporate America as casual Fridays.
Since they are a form of deferred compensation -- giving the holder the
right to buy stock at a set price, no matter how high it rises -- options have
historically not been recognized as a marital asset.
But with no federal law to govern the issue, it is being thrashed out in state
courts across the country. The most notable case was decided this spring,
when Lorna Wendt was awarded $20 million by a Connecticut court in a
case dealing in part with the General Electric options of Gary Wendt, her
former husband and chief executive of GE Capital.
It is difficult to determine just how often stock options are coming up in
divorce proceedings, but Michael McCurley, a Dallas lawyer who is
president of the American Academy of Matrimonial Lawyers, called them
"more and more an item of property division."
Stock options now figure in about 85 percent of his cases these days, he
said, about twice the proportion 10 years ago. About three-quarters are
negotiated in settlements, he added, while the rest are litigated.
In California's Silicon Valley, where shares in fledgling companies often
loom larger than paychecks in household assets, "it's becoming an
increasing bone of contention" in divorce cases, said Lynne Yates-Carter,
a lawyer in San Jose.
In California, at least, the law is settled: Options are included among
employee benefits that can be considered a household asset. As a result,
James Cox, family court settlement officer for Santa Clara Court, said,
"there is no end" to the type of option deals he has seen, adding that he
handles about 250 divorce cases annually that involve options.
In other states, though, much remains unsettled. First, the court must agree
that options are an asset to be divided; courts in Indiana, South Carolina
and Wisconsin have ruled that their statutes do not provide for such
treatment. Elsewhere, agreement is emerging that stock options are an
asset as subject to distribution in a divorce settlement as, say, a house.
The next issue is whether the options were acquired during the marriage.
While that may seem a simple matter, determining the calendar of an
option's award is a vast and poorly charted legal battlefield.
For example, an executive may be "vested" -- meaning that the option has
been awarded -- well before the start of divorce proceedings. But the
option may not have "matured," or reached the date when it may be
exercised. And its terms may provide for exercise at a price below the
market -- making it immediately profitable -- or at a higher price that the
stock would presumably reach sometime in the future.
Courts have looked to vesting schedules to determine whether certain
options should be considered marital property. But case law around the
country is now focusing more on the purpose for which the options were
issued.
"Generally, the date on which a stock option matures is irrelevant to the
purpose for which the option was granted," said Linda A. Olup, a lawyer
in Edina, Minn., representing Mrs. Hislop in her appeal. "What is
important is why the stock option was granted in the first place, as that
determines whether it is marital or nonmarital property."
Apart from determining the company's intent -- which may well be some
unquantified blend of reward and incentive -- another problem is
calculating the value of particular options, which by their nature involve an
unknowable future.
How, for instance, can a meaningful value be placed on the right --
granted but not matured -- to buy 10,000 shares of a software company
in 2008, no matter the exercise price?
"Valuing a stock option is absurdly difficult," said Douglas K. Fejer, a
Dallas expert in business evaluation, particularly of private companies.
Others disagree. Ross Zimmerman, an executive compensation specialist
at Hewitt Associates, a consulting firm in Lincolnshire, Ill., has helped
devise option plans for hundreds of big companies. "There is some intrinsic
value" to options on the date of their grant, he said. "The rule of thumb," he
added "is that the initial value of an option is about one-third its ultimate
value."
Seeking to avoid being hauled into divorce court, many companies are
redrawing agreements to try to make it clear that options are linked to
future efforts of the recipients.
In the Hislop case, Mrs. Hislop contended that the Telex options were not
for future performance, but a signing bonus to induce her husband to join
the company; thus, she argued, they were marital property of which she
should get 50 percent.
Through his lawyer, however, Hislop said his options were an incentive for
superior, continued performance -- in effect, golden handcuffs tying him to
the company's future, most of which would be after his marriage ended.
Telex officials were never asked to explain the rationale behind the
options. Among other documents, Mrs. Hislop did submit copies of the
offer of employment that her former husband received, which outlined the
options for which he would be eligible. Last week, the company declined
to comment.
The trial judge did not rule on the company's rationale for the award but
relied on the vesting schedule for the options, which were not fully matured
by the time of the divorce.
Last week, Kim Hislop's appeal for a larger share of the options was
denied; Ms. Olup, the appellate lawyer, said her client was considering
whether to file an appeal to the Minnesota Supreme Court.
Copyright 1998 The New York Times Company
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